Health Savings Account Guide

September 10, 2010

A health savings account can be a good option for people searching for health plans who don’t want to spend a lot of money on premiums for medical insurance.

Of course, we know there’s no such thing as cheap health insurance. If your premiums are low for individual health insurance that usually means you have high deductibles so you have affordable health insurance just as long as you don’t get sick…

Health savings accounts were created to make high deductible health insurance more realistic since they allow you to save up money tax free in case you do have to pay those high deductibles.  In this article we’ll talk about their benefits in addition to health savings account eligibility, contribution limits, and eligible expenses.

Health Savings Account Benefits
Here are four reasons why health savings accounts can be a good idea:

1) You have a savings plan for your health. – You can put money aside in an HSA to help pay for health care, today, tomorrow and even into retirement.

2) You own your HSA, even if you change jobs, health plans, move or retire. There is no use-itor- lose-it rule.

3) You decide when and how to spend the money for eligible medical and pharmacy expenses.

4) You save on taxes three ways:

  • The money you put in is tax deductible.
  • Your savings grow tax free.
  • Any money you take out to pay for eligible medical expenses is income-tax free.

You save on federal income, Social Security and Medicare taxes when you deposit money into your HSA via payroll deduction. If you are in the 25 percent federal tax bracket, for example, you save $32.65 in taxes for every $100 you deposit.You may also save on state income taxes; check with your state’s department of revenue services for rules in your state.

Health Savings Account Eligibility
In order to open and save in an HSA you must be enrolled in a high-deductible health plan that meets the guidelines set by the Internal Revenue Service. Typically these have high deductibles for individual and family coverage but low premiums.

Also, you cannot open an HSA if you :
1) Are covered by another health plan that is not a high-deductible health plan. Examples include:

  • A general purpose health care flexible spending account (FSA), including the grace period from a prior year. If you are currently participating in a health care FSA, you will need to zero out your balance in order to make HSA contributions.
  • Coverage under a spouse’s non-highdeductible health plan through an employer
  • A spouse’s general purpose health care FSA or health reimbursement account (HRA) that could pay your eligible expenses

2) Enrolled in Medicare, TRICARE or TRICARE for Life, a military benefits program

3) Eligible to be claimed as a dependent on someone else’s tax return

4) Have received Veterans Affairs health benefits within the past three months

Health Savings Account Contributions
To start saving in an HSA, you will need to enroll in a high-deductible health plan and find a qualified health savings account provider to open an account.

Once it’s open you setup a savings plan that determines how much money you’ll contribute once or twice a month.  If your HSA is through your employer, they may offer a payroll deduction option for your contributions.  When setting up your health savings account contributions remember to put enough away to cover eligible medical expenses when you need them.

Health Savings Account Contribution Limits
The most you can contribute to your HSA tax free this year is:

  • $3,050 if you have individual coverage
  • $6,150 if you have family coverage

These amounts are indexed annually and are set to increase in future years based on changes in the Consumer Price Index (CPI). However, if you turn 55 or older this year, you are allowed to deposit an additional $1,000 annually into your HSA, known as a “catch-up contribution”.

Both you and your non-dependent spouse can open individual HSAs, but the total amount deposited in the two accounts cannot be more than the maximum of $6,150 (plus catch-up contributions, if you are eligible).

Health Savings Account Eligible Expenses
The best place to get a list of eligible expenses is from your health savings account administrator but the HSA eligible items are defined by federal regulations so most lists you find should be similar.  Here’s a short list of covered items:

  • Doctor office visits, hospital and laboratory services
  • Dental care, including extractions and braces
  • Vision care, including contact lenses, prescription sunglasses, LASIK surgery
  • Prescription medications
  • Chiropractic services
  • Acupuncture
  • Hearing aids and their batteries
  • Medicare premiums and employer-provided retiree health care premiums

Keep in mind, even if your spouse or dependents are not covered by your high-deductible health plan, you can still use your HSA dollars to pay for eligible medical expenses for them. 


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Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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14 Responses to Health Savings Account Guide

  • Karen

    The real value of the HSA kicks in if you invest it in no-load Vanguard Mutual funds and watch it grow. Some HSA plans offers Vanguard funds, some of which are Admiral class. If you have small medical expenses, this is the way to go!


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